Conference Report

Investing for
Long-Term Value
Integrating environmental, social and governance value
drivers in asset management and financial research

— A state-of-the-art assessment —

54636—October 2005—750
Conference Report

Investing for Long-Term Value

Integrating environmental, social and governance value drivers
in asset management and financial research

— A state-of-the-art assessment —

Zurich, 25 August 2005

Date: 25 August 2005

Venue: SWX Swiss Exchange - Convention Point, Zurich, Switzerland

Hosted by:
•  UN Global Compact, www.unglobalcompact.org
•  Federal Department of Foreign Affairs Switzerland, www.eda.admin.ch
•  International Finance Corporation, www.ifc.org

This report prepared by:

•  onValues Investment Strategies and Research Ltd., wwww.onValues.ch
•  Published on 26 October 2005
Forewords by hosting institutions

Through the Who Cares Wins initiative, the Global Compact Office – working
with partners such as the Swiss Government and International Finance
Corporation – has been actively engaging with mainstream financial companies
and organizations in an effort to assist in the integration of environmental, Investing for Long-Term Value

social and governance (“ESG”) issues in investment analysis, processes and Integrating environmental, social
and governance value drivers in asset
management and financial research
decision-making. The conference convened in Zurich on 25 August 2005 marked — A state-of-the-art assessment —

an important milestone in this effort, bringing together senior executives from

across the financial spectrum.

A powerful and historic convergence is clearly under way, between the

objectives and concerns of the United Nations and those of the private sector,
including – crucially – the financial markets. Peace, security and development
go hand-in-hand with prosperity and growing markets. As finance, trade and
investment deepen the connections between people and societies, companies
and investors are increasingly faced with global – and potentially material –
ESG issues. The Global Compact stands ready to support efforts to advance
understanding and implementation in this rapidly evolving field.
Gavin Power
Senior Officer
UN Global Compact, Office of the Secretary-General

The world is smaller and investing in risky markets such as unstable or conflict
prone regions are not optional anymore but an emerging necessity. As risks
to individuals are risks to assets and security of individuals means security of
investments, financial organizations public as well as private, investors as well
as governments all share a converging interest in security, in stability and in
predictability.

In this world, developing and integrating environmental, social and governance

(“ESG”) issues in investment is inevitably becoming an obligation for
mainstream analysts and decisions makers. Although the financial industry
is one of the most competitive, a comprehensive response to this challenge
requires a space for a cooperative approach.

The process launched by the Who Cares Wins initiative in 2004 and the Zürich
Conference in 2005 offers this “neutral” space where cooperation, joint learning
and sharing perspectives to advance current thinking are possible. But this
should be seen as a stepping stone when the challenge remains to develop
concrete tools, strategies and services.

Ambassador Thomas Greminger,

Head, Human Security Division, Swiss Department of Foreign Affairs

This conference was important for three reasons. First, it marked the impressive
progress that has been made at the leading edge of the industry a year after
the Who Cares Wins report. Secondly, it illustrated the simple but formidable
power of like-minded people working in a broad alliance to achieve tangible
outcomes. Thirdly, it revealed the gathering momentum and the deep changes

iii
that are taking place in the investment value-chain. These are still early days,
and we need to be disciplined and focused on what matters most as we move
forward. But a “tipping point” may be approaching, and the International
Finance Corporation is proud to support this unique effort.
Rachel Kyte
Director, Environment & Social Development Department
International Finance Corporationw
Table of contents

1.  Goals of the conference . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2.  Key outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Investing for Long-Term Value

3.  Insights from plenary sessions . . . . . . . . . . . . . . . . . . . . . . . 4

Integrating environmental, social
and governance value drivers in asset
management and financial research

— A state-of-the-art assessment —

4.  Insights from break-out sessions . . . . . . . . . . . . . . . . . . . . . . 9

Annex 1:
A review of initiatives undertaken since the release of Who Cares Wins,
and some of the key gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Annex 2:
List of participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Annex 3:
Conference programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

“[We] are convinced that in a more globalised, interconnected and competitive

world the way that environmental, social and corporate governance issues
are managed is part of companies’ overall management quality needed to
compete successfully. Companies that perform better with regard to these
issues can increase shareholder value by, for example, properly managing
risks, anticipating regulatory action or accessing new markets […]”
— Financial institutions with total assets under management of over
6 trillion USD, endorsing the UN Global Compact report Who Cares
Wins, June 2004

Abbreviations
ESG: Environmental, Social and Governance […factors, drivers, issues]


1.  Goals of the conference

In June 2004 a group of 20 financial institutions with combined assets under

management of over US$6 trillion, published and publicly endorsed a report
facilitated by the UN Global Compact entitled Who Cares Wins: Connecting
Financial Markets to a Changing World. The focus of the report is a series Investing for Long-Term Value

of recommendations, targeting different financial sector actors, which taken Integrating environmental, social
and governance value drivers in asset
management and financial research
together seek to address the central issue of integrating Environmental, Social — A state-of-the-art assessment —

and Governance (ESG) value drivers into financial market research, analysis
and investment.
About one year later, on 25 August 2005, the endorsing institutions, together
with additional invited institutions (see participants list in Annex 2), met in
Zurich:

1. To review progress made in implementing the recommendations of Who

Cares Wins by financial market actors
2. To take stock and learn from the many initiatives (both individual and
collaborative ones) launched since the release of Who Cares Wins
3. To foster a dialogue between important actors, such as institutional
investors and fund managers, buy-side and sell-side research analysts,
investment consultants and their clients, specialised investment managers
and global houses
4. To identify key obstacles for a better integration of environmental, social
and corporate governance factors in investment, and how they can be
overcome
5. To improve the consistency of the message that involved institutions are
sending to financial markets, and agree on a continued debate on these issues
6. To explore new emerging issues in the ESG field.

The conference focussed on a limited number of key actors in the financial industry
(see also Fig. 1 from the Who Cares Wins Report). The following financial market
actors were represented at the conference:

• Institutional investors (several large pension funds and pension fund

managers)
• Asset managers (both specialised and large global managers)
• Buy-side and sell-side research analysts
• Consultants (the two global investment consultancies attended)
• Government bodies and regulators (e.g. UN and Swiss Government, London
and Swiss Exchanges took part).

The conference was designed in a way to foster an open and frank dialogue
between financial professionals (Chatham House Rule was applied), all of

Including ABN Amro, Aviva, AXA Group, Banco do Brasil, Bank Sarasin, BNP Paribas,
Calvert Group, CNP Assurances, Credit Suisse Group, Deutsche Bank, Goldman Sachs,
Henderson, HSBC, Innovest, ISIS, KLP, Morgan Stanley, RCM, UBS, Westpac, IFC. At
a later stage also Mitsui Sumitomo Insurance and China Minsheng Bank joined as
endorsing institutions.

 whom with already some experience in the “mainstreaming ESG” field, in
order to truly advance the understanding of the issues involved.

Analysts / Brokers
Investing for Long-Term Value
Incorporate ESG
Integrating environmental, social factors into
and governance value drivers in asset mainstream Investors / Asset
management and financial research Companies
research – “be managers
Lead the way by
— A state-of-the-art assessment — creative and R eward ESG
implementing ESG
thoughtful” research
principles and
Integrate ESG
Improving reporting
factors in research
and disclosure
and investment
processes

Better Pension trustees

Accountants
Facilitate investment Consider in
mandates and
standardisation
Educators
markets selection of
Facilitate ‘high- + managers
level’ thinking and Governments/
training on ESG More Multilat. agencies
issues sustainable Proactively
consider in PF
societies investment

Consultants
Combine ESG Regulators /stock
research with exchanges /
industry level governments
research Implement
Support demand NGOs reporting standards
and awareness Transfer e.g., listing
building objective ESG particulars
information on
companies to the
public and the
financial community

Fig. 1: Key actors involved in the “mainstreaming ESG” field (from the Who Cares Wins
report).

2.  Key outcomes

The main outcomes from the discussions at the conference can be summarised
as follows:

Discussion themes:
• There was a remarkable degree of agreement among participants that ESG
factors play an important role in the context of longer-term investment
strategies and that the financial industry must improve their consideration
in research and investment processes. Some participants also remarked
that taking into account material ESG factors already today falls within the
fiduciary responsibility of investors.
• An encouraging number of individual and collaborative actions have
been undertaken by the financial industry in the past year with the goal of
improving the understanding and integration of ESG factors in investment
(see Annex 1).
• Many current developments are pointing towards a more long-term approach
to investing based on sound ESG research.
• In spite of this, progress in the industry has been slow. We are today at a
critical juncture: ESG considerations could attain unstoppable momentum,


 but could also be pushed back by powerful forces interested in short-term
gains only (majority of institutional investors was seen as behaving this way;
hedge funds were mentioned).
• Overall, conference participants expressed a strong confidence in the
entrepreneurial spirit of fund managers and other professionals that will seize
Investing for Long-Term Value
the business opportunities offered by long-term investing (many innovative
Integrating environmental, social
investment solutions and products were presented at the conference). and governance value drivers in asset
management and financial research

Even if current “cultural” and regulatory frameworks are not particularly — A state-of-the-art assessment —

supportive of long-term investing, the entrepreneurial spirit will triumph,

according to many conference participants.
• Key challenges remain, in particular a more consistent message from key
actors such as pension funds, their trustees and investment consultants,
and consistency and integrity of ESG data available to analysts and fund
managers. A key challenge was also seen in better institutionalising financial
institutions’ commitment toward ESG issues, versus the current status of
single individuals or teams leading the implementation process. It was
also noted that the traditional approach of segmenting investment styles
and asset classes had created a system of “rigid silos” which is impeding
innovation and becoming a serious problem for the industry.
• There was also general agreement that ESG factors should be truly
“mainstreamed” and not treated as a separate category. One participant
remarked that “pigeonholing ESG as a separate category will kill it”.
• Who was there was as important as what was said: organizers are pleased
to see many major, mainstream organisations now attending and engaging
actively in the debate (see list of attendees).

Forward plans
Almost all participants expressed the wish to establish the conference as a
yearly recurring event. The hosts have confirmed that they are willing to sponsor
a similar event in 2006. It will most probably take place again in Switzerland at
the beginning of September 2006. Participants, through the feedback forms,
proposed a series of topics for future meetings, including:
• Invite CEOs and CFOs in order to facilitate the dialogue between companies
and investors – this could focus on specific industries and/or topics, and
could be supported by existing Global Compact platforms
• Focus on a specific sector, allowing analysts and fund managers to present
in detail how ESG drivers are taken into account for that specific sector
• Focus on specific themes, e.g. human capital, reputation risks, climate
change, and explore in more depth how their consideration adds value to an
investment process
• Use the conference as a platform to define an action plan and set priority
areas for further research/ tools development in the coming year
• Focus on new emerging themes/risks, or cutting edge applications
• Also invite other key stakeholders that have not participated so far.
To support awareness-building among young professionals entering the
industry, one participant proposed that all conference attendants commit to
giving a presentation at a business school or professional training course on

 ESG issues until we meet again next year. There was strong support for this
proposal.

3.  Insights from plenary sessions

Investing for Long-Term Value The plenary sessions covered the whole morning and were very rich, both in
Integrating environmental, social
and governance value drivers in asset terms of presentations (ten presentations by the hosts, institutional investors
management and financial research

— A state-of-the-art assessment — and fund managers), and in terms of the discussions.

In his introductory remarks, Ivo Knoepfel from onValues summarised some of
the recent developments pointing in favour of a more long-term approach to
investing based on sound ESG research:
• Times of easy financial gains in capital markets are over -> we are forced to
look at less speculative, skills-based investment approaches
• Hedge funds have reduced short-term market inefficiencies -> long-only
investors are forced to focus more on long-term
• Globalisation is happening at a breathtaking speed and the world is truly more
interconnected -> what is happening in terms of social and environmental
trends in China or Brasil or in any part of the world is not irrelevant to Wall
Street anymore
• We are all awakening to the fact that fossil fuel reserves are limited and that
climate change is truly happening -> this means huge systemic changes in
our economies, leading to both risks but also considerable opportunities for
investors.
Ambassador Thomas Greminger from the Swiss Department of Foreign Affairs
welcomed participants and mentioned that ESG issues considered “soft factors”
in the past can have very tangible effects on investment value in today’s world.
He mentioned human security and business operations in conflict areas as
examples – both areas which his department is working on. Gavin Power from
the UN Global Compact Office linked this conference to last year’s release of
the Who Cares Wins report. He also offered the continuous support of the UN
Global Compact in facilitating a dialogue between financial market actors, and
between investors and companies (over 2200 companies have endorsed the
Global Compact so far).
Anthony Ling from Goldman Sachs tackled the topic of the conference head-
on by answering the four key questions that organisers had asked conference
participants to focus on:

• Are investors expressing a serious interest, clearly articulating their

needs, walking the talk?
• Are providers responding to the signals coming from clients in a purely
opportunistic way or are we starting to see an uptake in core business
strategy?
• Are the right frameworks in place? Are other key financial actors
(consultants, brokers, regulators) in tune?
• What are the most probable scenarios? Will mainstream ESG investment
become a reality/by when? What are the key challenges faced and how
to deal with them?

Ling’s views were widely supported by the audience. The following four boxes
summarise his comments and answers to the four questions.

Are investors expressing a serious interest, clearly articulating their needs,

walking the talk?
• Yes, no, maybe? ESG, CSR, SRI – are we all speaking the same Investing for Long-Term Value

Integrating environmental, social

language? and governance value drivers in asset
management and financial research

• Applaud all of the initiatives and effort. But ... — A state-of-the-art assessment —

• The same institutions can be giving different messages

• Few genuinely link ESG to mainstream
• The broadness of the Catholic church means players have widely
differing requirements
• For most ESG is still peripheral in terms of the broker poll contribution
• Combined commission of EAI well below that of a big hedge fund
• The transatlantic gap remains, in spite of stirrings in the US
• There is serious intent from a genuinely committed group of people, and
the number is growing ...
• ... they are walking the talk, but it is not institutionalised

Are providers responding to the signals coming from clients in a purely

opportunistic way or are we starting to see an uptake in core business
strategy?
• Yes, no, maybe? ESG, CSR, SRI – are we all speaking the same
language?
• To my knowledge, Citigroup, Deutsche, DKW, Goldman Sachs, HSBC,
JPMorgan, Morgan Stanley, Soc Gen, UBS, have all set up, or significantly
expanded, ESG teams in the last year
• All based in London. All stand-alone groups vying for resources in a
world of shrinking commissions. The settlement is still vulnerable
• All are about the size of a small/mid-size sector team. Reflects the
economics of the business and always will do. The plant needs
nourishing
• Widely different approaches: good choice for users, but reflects lack of
consistency in message
• We think we’re responding but we’re not sure. We think we’re part of a
core strategy but we’re not sure
• Partnerships with “expert groups”, advisory capacity to teams, lists of
issues are relatively easy to produce
• However, they do not genuinely add value to mainstream and they are
not durable


 Are the right frameworks in place? Are other key financial actors
(consultants, brokers, regulators) in tune?
• No, no, no. And they may never be!
• Given the diverse requirements of the end users it is not necessarily
Investing for Long-Term Value realistic
Integrating environmental, social
and governance value drivers in asset
management and financial research
• Entrepreneurial spirit “if you build it they will come” will triumph over
— A state-of-the-art assessment — over-inclusive, bureaucratic consensus-building
• Move at the speed of the fastest, ablest and most willing, do not wait
for the slowest
• We need a consistent message from consultants, to buy-side, to sell-
side, and to corporates
• We need consistency and integrity of data to analyse: for this we need
consistency across regulators and stock exchanges
• With a consistent message, and consistency of data, market forces will
do the rest

What are the most probable scenarios? Will mainstream ESG investment
become a reality/by when? What are the key challenges faced and how to
deal with them?
• We are all believers. If we are right ESG will become mainstream within
a five-year period
• Each piece of research, each mandate won is a victory. Lots of small
victories will win the war
• Market forces will win out in the end. As time progresses, proof of
concept increases – after a number of years irrefutable evidence will be
in place
• The results of the “Generation Lost: Young Financial Analysts and ESG
issues” Young Managers Team report are a slap in the face
• Pigeonholing ESG as a separate category will kill it – it must be embraced
as part of mainstream
• Actions not meetings now needed from a core group of believers
• Institutionalising individual commitment is the major challenge

In his presentation, Richard West from UBS underlined key reasons for the
growing importance and recognition of ESG factors in the financial industry,
which he summarised as follows:

•  Increasing opportunities in sustainable energy, water supply, health…

•  Liability risk: asbestos USD200bn, tobacco USD300bn
•  Heath issues: obesity, mobile phone concerns
•  Climate change and insurance costs/losses, litigation risk
•  Reputation risk: employing child labour, pollution, nuclear waste
• Management quality key to success; management reward aligned to
shareholder value creation

Richard West also showed how UBS is both capturing business opportunities
in terms of new products, as well as incorporating ESG factors in its investment
process.
Jan Straatman from ABP Investments supported the view that long-term
investing adds value to a pension plan, but also reminded that client needs
Investing for Long-Term Value
and ambition level need to be matched with the investment model. ABP is
Integrating environmental, social
actively engaged in a series of initiatives aimed at better integrating material and governance value drivers in asset
management and financial research

ESG issues in its investment process. Jan pointed to the fact that the success of — A state-of-the-art assessment —

Hedge Funds has proven that “traditional product models” are suboptimal
and that the ability to think “out of the box” and explore new grounds beyond
rigid product silos will be crucial in future.
Philippe Lespinard of BNP Asset Management underlined the importance of the
consistency of the message toward clients, sponsors, oversight bodies, market
actors. He underlined BNP PAM’s conviction that ESG issues have a material
impact on a company’s performance and are poorly reflected in the valuation
of financial assets. He mentioned that fundamental investors cannot afford not
to know or care. He also briefly presented the Enhanced Analytics Initiative
which his company has co-founded and which has been effective at prompting
investment brokers at producing research incorporating ESG factors.
Rachel Kyte of the IFC stressed how many of the ESG issues are even more
crucial in an emerging market context. She often observes a disconnect
between different departments within the same financial institution: while the
project finance people are often well aware of the considerable environmental
and reputational risks entailed in certain activities, other investment banking or
asset management departments seem to ignore them.
In his presentation, Richard Lacaille from State Street Global Advisors
expressed the view that the agendas of mainstream investors and mission-
based investors are converging to a great extent. He stressed that for ESG
factors to be incorporated in mainstream investment processes, definitions of
risk must be expanded, time horizons must be extended, uncertainty must be
accepted. He also described SSgA’s disciplined process leading to performance
consistency.
Colin Melvin from Hermes Investments pointed to the fact that large institutional
investors, because of their size and passive investment styles, have a stake
in whole economies. Hermes has therefore developed an Equity Ownership
Service which focuses on corporate governance and engagement ideally suited
for such investors.
The two moderators, Ivo Knoepfel and Peter Zollinger, summed up their personal
impressions and key insights from the day. In particular, Peter Zollinger from
SustainAbility mentioned the following points:

• There was strong support among attendees for truly incorporating ESG
factors in mainstream investment, vs. pigeonholing them as a separate
category.
• Participants at the conference probably represent the more advanced
institutions. The impression is that the financial industry as a whole is
still at the very beginning of a process aimed at better understanding and
incorporating ESG factors.

 • There are still formidable cultural barriers toward a better consideration of
ESG factors in the industry. The recent UNEP-FI survey of young analysts
showing how little they care for ESG issues is a “slap in the face” for all of
us and highlights the need for active, personal leadership by those present
in the room.
Investing for Long-Term Value
• It is interesting to note that conference attendants were not sure about
Integrating environmental, social
and governance value drivers in asset
management and financial research
the role regulators should play in this field. Many participants supported
— A state-of-the-art assessment — Anthony Ling’s view that the entrepreneurial spirit of pioneering companies
will ultimately prevail and the importance of having the “right” legal
frameworks in place should not be overestimated. On the other hand, many
participants also stressed the importance of the availability and consistency
of ESG data from companies, which could be achieved by mandatory
reporting requirements.
• Given its early stage, any further progress of embedding the principles of
ESG-led investing requires the personal courage and entrepreneurial spirit
of its advocates to “simply go and do it”.

In his concluding remarks, Ivo Knoepfel offered a selection of quotes from

participants that struck him most during the day:

• “We should all focus on future trends and market developments in

the context of better fundamental research – this clearly adds value to
investments”
• “There is often a disconnect between different parts of the same
institution sending confusing signals to other market participants, e.g.
the project finance department might be well aware of some of the
ESG risks on the ground, but these are unknown in other parts of the
organisation”
• “We have built rigid silos according to investment styles and asset
classes in the past and this is increasingly impeding innovation”
• “It is companies that lead the ESG agenda; this forces the buy-side to
innovate; and this, in turn, forces the sell-side to innovate”
• “We can learn from the hands-on, in-depth knowledge of private equity
investors”
• “When I am standing in front of my clients I just can’t afford not to know
[about crucial environmental and social issues leading to liabilities and
loss of reputation]”
• “We need to expand the application of ESG factors also to other asset
classes”
• “Consultants are often a big problem: they say they support my concept
but that I should come back in 10 years with a proper track-record”
• “Everybody is telling me that “management quality” is the single most
important indicator affecting stock value – I just don’t see analysts and
fund managers taking it systematically into account”
• “In our equity valuation models we actually already account for very
long-term effects by calculating terminal value which often accounts for
more than half of fair value”


4.  Insights from break-out sessions

The afternoon of the conference was dedicated to three parallel break-out

sessions. Because each session was repeated twice, participants were able
to attend two out of three sessions. Each session was introduced by a series
of short presentations highlighting innovative initiatives, products or services Investing for Long-Term Value

(see Conference Programme in Annex 3). Integrating environmental, social

and governance value drivers in asset
management and financial research

— A state-of-the-art assessment —

Session 1: Initiatives by institutional investors

Goals:
• Provide an overview of some of the most effective collaborative initiatives
by investors
•  Identify success factors but also weaknesses of these initiatives
• Competition vs. collaboration: in what case is one better than the other
in advancing innovation and integration of environmental, social and
governance factors in investment

Short summary/key highlights

The session provided a good overview of some of the most innovative
collaborative initiatives launched in recent months, including the Enhanced
Analytics Initiative, the Institutional Investors Group on Climate Change, the
Conference Board working group on ESG risks and the UNEP-Global Compact
Principles for Responsible Investment project.
These initiatives were seen as a highly efficient possibility for investors to
“bundle” and amplify their message to financial markets. In the discussion it
was stressed that synergies between different initiatives should be better used,
e.g. by joining forces on common positions and by actively communicating the
complementary role of different initiatives.
Indeed, it was recognized that there appears to be significant opportunities for
cross-fertilization and the leveraging of synergies and outputs. For example,
it was noted that The Conference Board’s current work on the identification
of specific ESG factors aligned to ten industries, as well as a tool for analysts
to use in incorporating ESG factors into discounted cash flow models, could
feed directly into the work of the Enhanced Analytics Initiative, as well as the
Principles for Responsible Investment program.
A defining feature of all these initiative is a high degree of collaboration among
the organizations and stakeholders involved. This is especially noteworthy
given that in many instances the organizations are traditionally highly
competitive. This fact reflects the reality that the ESG field is quite new and
avant-garde, which puts a premium on collective action and collaborative
sharing of emerging/best practices.
However, some limitations to collaboration were noted, including the labor-
intensive aspect of cooperation and partnering, as well as the occasional desire
to protect intellectual assets and competitive advantage.
The importance of sending a consistent message to financial markets was also
stressed. If different parts of the same institution send contradictory signals

 (e.g. business lines ignoring corporate initiatives), the market will take such
policy statements and joint initiatives with a high degree of cynicism and
simply ignore them.

Session 2: Buy-side and sell-side research

Investing for Long-Term Value

Integrating environmental, social Goals:

and governance value drivers in asset
management and financial research

— A state-of-the-art assessment —
• Clarify the needs of the buy-side (investors, asset managers) with regard
to extra-financial research – which contents, formats, types of services are
needed?
• Identify key trends and challenges of “mainstreaming” extra-financial
research in financial analysis, e.g. in terms of analysts’ professional curricula
and remuneration systems
• Identify other players that could play an important role in providing better
ESG research in the future – e.g. independent research houses, rating
agencies, think-tanks

Short summary/key highlights
The dialogue between sell-side and buy-side analysts was at the core of
Session 2. The session began with presentations by BNP PAM (buy-side), and
Dresdner Kleinwort Wasserstein and UBS (sell-side). These real-life reports are
an encouraging indication that powerful innovation is indeed happening.
Luc Zandvliet from Collaborative for Development Action presented a case-
study on the operational and reputational risks of companies doing business
in conflict zones.
The discussion revolved around the question of what it takes for extra-
financial research to become truly mainstream, leading to the following key
statements:
• It is important to find the right language; ideally avoid terms such as ESG
and use terms such as “strategic research”, “long-term issues” etc.
• It is important to focus on few issues that are relevant to specific sectors,
and not cover the whole spectrum of ESG issues for all sectors
• It is important that mainstream analysts, informed by SRI specialists, take
care of these issues, and they are perfectly capable of doing it
• EAI with its clear incentive mechanism has already had an important impact
– but it needs to grow in order to make a difference
• Extra financial research must be included in analysts’ annual reviews and
remuneration systems (e.g. pay them to write specific research reports and
they will do it)
• Awareness-building and training of analysts is important – start with issues
that are easily quantifiable
• Stimulate competition between analysts.

The case study on business in conflict zones showed how challenging it can be
for new emerging issues to be considered in financial research. Luc Zandvliet
showed that risks can nevertheless be managed and that “best practice”

10
criteria and indicators can be used for investment research purposes. With
rising commodity prices and companies increasingly operating in developing
countries, good stakeholder and community relations management will become
a more and more important factor in the future.

Session 3: Innovations in investment processes and products Investing for Long-Term Value

Integrating environmental, social

and governance value drivers in asset
Goals: management and financial research

— A state-of-the-art assessment —

• Showcase particularly innovative investment process designs for long-term

investing which take into account environmental, social and governance
factors
• Showcase innovative investment products and services for long-term
investing (only general descriptions)
• Identify key trends and challenges to increasing supply and demand for such
services
• Identify different types of investors interested in this offer and how asset
management can best respond to their needs.

Short summary/key highlights

Different approaches taken by a large global provider (Credit Suisse) on one
side, and specialised investment houses (Calvert, Generation) and research
providers (Innovest) on the other, were at the centre of the introductory
presentations and the discussions in this session.
The speakers agreed that it was possible to integrate ESG information in
traditional investment processes and valuation models and presented their
own approaches and experience in the field. It was stressed, for example, that
terminal value calculation in the context of standard DCF models provides a
possibility to take into account long-term ESG factors.
Some key challenges remain, including the availability and quality of ESG data,
the uncertainty involved in dealing with long-term horizons, the need to expand
the application of ESG approaches also to other asset classes such as bonds,
real estate, etc.
The discussion also pointed to the importance of overcoming cultural barriers
and introducing the right incentive systems for fund managers and analysts
in an industry which is strongly “people-driven”. Practical solutions such as
remuneration systems for analysts linked to 3-year rolling financial performance
were presented.
Participants also pointed to problems with institutional investors that were not
“walking the talk” and investment consultants often hindering innovation and
longer-term approaches.

11
Annex 1: A review of initiatives undertaken since the
release of Who Cares Wins, and some of the key gaps

In preparation for the conference, the IFC commissioned a study prepared

by David Gait, Cecilia Bjerbörn and Dan Siddy, outlining the many initiatives
undertaken in the field of “mainstreaming ESG” in the investment world since Investing for Long-Term Value

the release of the Who Cares Wins study. The following table summarises a Integrating environmental, social
and governance value drivers in asset
management and financial research
selection of the most interesting initiatives undertaken by different financial — A state-of-the-art assessment —

market actors and also some of the key remaining gaps. For the full report go
to http://www.ifc.org/sfmf.

Table 1: A summary of key developments

Financial Sector Major Developments in the past year

Actor

Pension Fund • Investor Network on Climate Change (INCR)

Trustees conference, subsequent “Investor Call for
Action” (May 05) and publication of “Investor
Guide to Climate Risk.” (July 05)
• Enhanced Analytics Initiative launched (EAI)
(Oct 04)
• Principles for Responsible Investment
launched (PRI)
• Increased investment in clean technology
sector – including US$1bn commitment from
INCR Call to Action signatories
• US pension fund collaborative engagement
- e.g. 15 US pension funds sent letters to 43
power sector companies requesting climate
risk reports (July 05)

Governments/ • Le Fonds de Réserve pour les Retraites (FRR),

Multilateral a French Government pension reserve fund
Agencies set up in 2003, launched a new 600 million
euros European Equity “Socially Responsible
Investment” mandate (June 05)

Consultants • Mercer build SRI team

Investors/ Asset • EAI

Managers/ Buy- • Conference Board’s ESG Tool for Analysts
Side Research
• World Economic Forum and AccountAbility
published “Mainstreaming Responsible
Investment” (Jan 05)
• Strong growth in “clean technology” private
equity funds
• Third Round of Carbon Disclosure Project
launched. 143 institutional investors with
assets of $20trillion wrote to the 500 largest
listed global companies (Feb 05)
• Generation Investment Management
launched

13
 Financial Sector Major Developments in the past year
Actor

Investment • EAI
Brokers/ • Conference Board’s ESG Tool for Analysts
Sell-Side Research
Investing for Long-Term Value
• Sell-side organisations such as Goldman
Integrating environmental, social
and governance value drivers in asset Sachs, UBS and Citigroup established new
management and financial research

— A state-of-the-art assessment —
SRI teams
• New sell-side research commitment, often
in collaboration with specialist NGOs/SRI
firms. For example, Merrill Lynch initiated
partnership with WRI to publish: “Energy
Security and Climate Change: Investing in the
Clean Car Revolution” (July 05)
• Prompted in part by Rainforest Action
Network’s Global Finance Campaign, several
leading US banks launched firm-wide ESG
policies, including JP Morgan, Bank of
America, Wells Fargo and Citigroup
• IFC designed emerging markets research
competition

Academic • Mistra (Swedish Foundation for Strategic

Institutions/ Environmental Research) launched three year
Educators major research programme on “Behavioural
Impediments to Sustainable Investment” and
“Sustainable Development – The New Role of
Institutional Investors” (June 05)

Regulators • Few significant regulatory developments

• UK Government passed “Operating Financial
Review”, requiring listed companies to
disclose relevant ESG information (April 05)
• Germany passed regulation which mandates
corporate pension funds to disclose any
policies they have on social, environmental
and ethical issues (July 05)

Stock Exchanges • London Stock Exchange set up Corporate

Responsibility Exchange

Companies • Many examples of new ESG-related strategies,

including launch of General Electric’s
“Ecomagination” (May 05)
• Global Compact network increased from
around 1400 to over 2000 companies
• GRI reporting companies grew from 450 to
over 700
• Leading up to G8 summit, the heads of 23
global companies released a joint statement
expressing strong support for action to
mitigate climate change (June 05)

14
 Financial Sector Major Developments in the past year
Actor

NGOs • WRI collaborated with Ceres, SAM Group

and Merrill Lynch to produce a series of high
quality, original research reports Investing for Long-Term Value

• WWF and Allianz produced joint report Integrating environmental, social

and governance value drivers in asset
“Climate Change and the Financial Sector: An management and financial research

— A state-of-the-art assessment —
Agenda for Change”

Table 2: A summary of key gaps

Financial Sector
Key Gaps
Actor
• Pension fund trustee consideration of ESG
issues in formulation of mandates and manager
Pension Fund selection sill not widespread
Trustees
• EAI requires broadened and deepened
membership to fulfill potential

• Opportunities for further progress by

Governments/
government and multilateral pension funds
Multilateral
to integrate sustainable investment principles
Agencies
taking into account their fiduciary duty

• Greater technical research still required from

Consultants consultants and academics on the implications
and Academic of ESG integration in different asset classes
Institutions and with different styles, for both returns and
alternative measures of risk

• Short-termism – indications that the industry

as a whole is still getting even more short term.
Specific initiatives needs to ensure this short-
term industry takes account of ESG issues
Investors/ Asset • More emphasis needs to be placed on the time
Managers/ Buy- horizon of incentivisation programmes for
side research investment professionals
• EAI requires broadened and deepened
membership to fulfill potential
• Fund managers slow to develop high quality
long-term investment products
Investment
• Expansion of geographical and industry
Brokers/ Sell-Side
coverage of ESG research required
Research
• Regulators have not yet taken an active role. In
some cases, their interventions have made it
more difficult, rather than easier, for investors
Regulators to focus on long-term horizons and ESG
integration (e.g accounting and reporting rules
forcing pension funds to report on a quarterly
basis)

15
 Financial Sector
Key Gaps
Actor
• Follow-through required after promising new
Stock-exchanges initiatives. Focus on practical measures that
also make business sense for the exchanges
Investing for Long-Term Value

Integrating environmental, social • Better identification and communication of key

and governance value drivers in asset
management and financial research Companies ESG strategies, challenges and value drivers
— A state-of-the-art assessment —
• ESG reporting could be more investor friendly

16
Annex 2: List of participants

Break-out Break-out
Company Family name First name Position
Round 1 Round 2

Head of Investing for Long-Term Value

ABN AMRO
Corporate Integrating environmental, social
Asset and governance value drivers in asset
Moolenburgh Edward Governance Session 2 Session 3 management and financial research
Management
& Sustainable — A state-of-the-art assessment —
S.A.
Development

ABN AMRO Senior Vice

Van Assem Vincent Session 3 Session 1
Bank N.V. President

ABN AMRO Senior Officer

Bos Johan Session 2 Session 3
Bank N.V. SD Reporting
Chief
ABP Investment
Straatman Jan Session 3 Session 1
Investments Officer - Capital
Markets
Vice President
Bank
Kämpf Klaus Sustainability Session 3 Session 1
Sarasin
Research
Head of
BBVA Suiza De Andino Luis Sanz Investment & Session 3 Session 1
Markets
BNP Paribas Head of
Asset Borremans Eric Sustainability Speaker Speaker
Management Research
BNP Paribas Chief
Asset Lespinard Philippe Investment Session 2 Session 3
Management Officer

Caisse des
SRI Research
Dépôts et Alberola Emilie Session 2 Session 1
analyst
Consignations

Calvert Senior Vice

Falci Steve Speaker Speaker
Group President

CCRS Center
Managing
for Corporate Burkhard Hans-Peter Session 3 Session 1
Director
Responsibility
CCRS Center
for Corporate Seilder Alexander Researcher Session 1 Session 3
Responsibility
Collaborative Director
for Corporate
Zandvliet Luc Speaker Speaker
Development Engagement
Action Project

Global Head of
Credit
Schanzenbächer Bernd Sustainability Session 3 Session 1
Suisse
Affairs / GCBS

Credit
Head Global
Suisse Asset Langewand Jens Speaker Speaker
Equity, Director
Managemet

17
 Break-out Break-out
Company Family name First name Position
Round 1 Round 2

Global Head
Dexia Asset
Vermeir Wim of Equity Session 3 Session 2
management
Management
Investing for Long-Term Value

Integrating environmental, social Head of SRI

and governance value drivers in asset DrKW Packman Myles Speaker Session 3
management and financial research Product
— A state-of-the-art assessment —

Managing
Ecofact Zenklusen Oliver Session 1 Session 3
Consultant

Erste Bank Head of Group

Mostboeck Friedrich Session 1 Session 2
Group Research

F&C Asset
Jenkinson Kirsty Senior Analyst Session 2 Session 1
Management

Federal
Department of Pachoud Gerald Policy Advisor Speaker Speake
foreign Affairs

Federal
Junior policy
Department of Gardaz Adrienne Rapporteur Rapporteur
advisor
foreign Affairs

Federal Head of
Department of Greminger Thomas Division,    
foreign Affairs Ambassador

Fund Manager
First State - Emerging
Gait David Session 1 Session 2
Investments Markets/ Asia
Pacific
Generation
Investment Head of
le Duc Colin Speaker Speaker
Management Research
LLP
Financial
Goldman
Forrest Sarah Analyst, ESG Session 2 Session 3
Sachs
team leader
Managing
Director
Goldman
Baird Andrew - Global Session 1 Session 2
Sachs
Investment
Research

Goldman Co-Head
Sachs Ling Anthony European Session 1 Session 3
International Research

Head of
Henderson Lake Rob Corporate Session 3 Speaker
Engagement

Hermes
Director
Investment
Melvin Colin - Corporate Session 1 Session 2
Management
Governance
Limited

18
 Break-out Break-out
Company Family name First name Position
Round 1 Round 2
Head of
Henderson Lake Rob Corporate Session 3 Speaker
Engagement
Investing for Long-Term Value
Hermes
Director Integrating environmental, social
Investment and governance value drivers in asset
Melvin Colin - Corporate Session 1 Session 2 management and financial research
Management
Governance — A state-of-the-art assessment —
Limited
Innovest
Strategic
Kiernan Matthew Chief Executive Speaker Speaker
Value
Advisors
InSpire
Willums Jan-Olaf Chairman Session 2 Session 3
Invest
Director,
International
Environment
Finance Kyte Rachel Session 2 Session 3
& Social
Corporation
Development

International Sustainable
Finance Siddy Dan Financial Session 3 Session 1
Corporation Markets Facility

London Head of Sales

Stock Braun Georg and Marketing, Session 3 Session 2
Exchange IR Solutions
Mercer
Investment
Investment Hegglin Peter Session 1 Session 3
Consultant
Consulting

Mistra Thörnelöf Eva Deputy Director Session 1 Session 3

oekom
Hassler Robert CEO Session 2 Session 3
research AG

onValues Ritter Regula Senior Adviser Rapporteur Rapporteur

Managing
onValues Knoepfel Ivo Moderator Moderator
Director

onValues Specking Heiko Analyst Rapporteur Rapporteur

OTP Fund SRI Specialist,

Landell-Mills Natasha Session 1 Session 3
Management Advisor

OTP Fund
Holtzer Peter Chairman Session 1 Session 3
Management

19
 Break-out Break-out
Company Family name First name Position
Round 1 Round 2

Advisor to
the managing
PGGM Russelman Gerrit Session 2 Session 1
Director
Investing for Long-Term Value
Investments
Integrating environmental, social
and governance value drivers in asset
management and financial research Corporate
— A state-of-the-art assessment — Governance
PGGM Fehrenbach Gerard Session 2 Session 1
Lawyer
Investments
Sustainable
Pictet & Cie Butz Christoph Investment Session 3 Session 2
Specialist
CIO, Socially
RCM (UK)
Jankoswska Bozena Responsible Session 3 Session 2
Ltd.
Investment

Managing
responsAbility Tischhauser Klaus Session 1 Session 3
Director

SAM
Managing
Indexes Barkawi Alexander Session 3 Session 1
Direktor
GmbH

SAM- Chief
Sustainable
Werner Christian Investment Session 3 Session 2
Asset
Management Officer

SiRi Managing
Spicher Philippe Session 2 Session 3
Company Director

SRI World President SRI

Falk Jay Session 1 Session 3
Group World Group

State Street Chief

Global Lacaille Rick Investment Session 3 Session 2
Advisors officer, Europe

Managing
SustainAbility Zollinger Peter Moderator Moderator
Director

Swiss Re Dudle Pascal Vice President Session 3 Session 2

Managing
Swiss Re Mehn Hans Session 1 Session 2
director

Sustainability
Swiss Re Weymann Martin Session 2 Session 1
Advisor

Head
SWX Meier Richard T. International & Session 2 Session 3
Research

20
 Break-out Break-out
Company Family name First name Position
Round 1 Round 2

Director of
The Research,
Conference Vidal David Global Speaker Speaker
Investing for Long-Term Value
Board Corporate
Citizenship Integrating environmental, social
and governance value drivers in asset
management and financial research

— A state-of-the-art assessment —
Institutional
Trucost Plc Barker Rob Session 3 Session 1
Client Manager

Communications
UBS Leitz Christian Management, Session 1 Session 2
Director

Director, SRI
UBS Gamboni Gianreto Session 1 Session 2
analyst

Managing
UBS Hudson Julie Director, SRI Session 3 Speaker
Research
Director Group
UBS Kermode Yann X. Environmental Session 1 Session 3
Policy
UBS Global Head of
Asset West Richard European    
Management Equities

UN Global Head, Financial

Power Gavin Moderator Moderator
Compact Markets

Programme
UNEP Finance
Hagart Gordon Manager, Speaker Speaker
Initiative
Investment
Universities Advisor,
Superannuation Thamotheram Raj Responsible Speaker Session 3
Scheme Ltd. Investment

Leader
Watson Wyatt
Zaugg Beat Investment Session 3 Session 1
AG
Practice, CFA

Associate
WestLB Wallenfels Marek Session 1 Session 3
Director

World
Senior
Resources Sohn Jon Session 2 Session 3
Associate
Institute - WRI
Head of
Environmental
Zürcher and Social
Döbeli Sabine Session 3 Session 2
Kantonalbank Research,
Member of Senior
Management

Senior Financial
Analyst
Zürcher
Bösch Stefan Sustainable Session 3 Session 1
Kantonalbank
Enterprise
Program

21
Annex 3: Conference programme

9:30 Registration and coffee

10:00 Welcome and introduction

Investing for Long-Term Value
• Welcome address, Ivo Knoepfel, onValues
Integrating environmental, social
and governance value drivers in asset
• Welcome address, Ambassador Thomas Greminger, Federal Department of management and financial research

— A state-of-the-art assessment —
Foreign Affairs
• Introduction by Gavin Power, UN Global Compact Office

10:30 Keynotes
• Anthony Ling, Co-Head of European Research, Goldman Sachs
• Richard West, Head of European Equities, UBS Global Asset Management
Moderator: Ivo Knoepfel, onValues

11:00 Part I

Clients’ needs and the financial industry’s responses

(A panel debate between institutional investors and financial service providers,
introduced by short presentations by the panellists, followed by Q&A/discussion
with the audience)

Institutional investors:
• Jan Straatman, CIO Global Capital Markets, ABP Investments
• Rachel Kyte, Director, International Finance Corporation
• Colin Melvin, Director, Hermes

Financial service providers :

• Philippe Lespinard, CIO, BNP Paribas Asset Management
• Rick Lacaille, CIO Europe, SSgA Ltd.
• Richard West, Head of European Equities, UBS Global Asset Management
• Anthony Ling, Managing Director, Goldman Sachs.
Moderator: Peter Zollinger, SustainAbility

12:30 Lunch

13:45 Part II – Break-out sessions

Tools, products and initiatives for implementation

(3 parallel break-out sessions repeated in two rounds. Each participant has the opportunity
to take part in two sessions. Each session is introduced by 3-4 short presentations)

13:45 Start of round 1

15:00 Coffee break

15:15 Start of round 2

23

Investing for Long-Term Value
Integrating environmental, social
and governance value drivers in asset
management and financial research
— A state-of-the-art assessment —
24
Session 1: Initiatives by institutional investors
Introductory presentations:
• Raj Thamotheram, USS/ Enhanced Analytics Initiative
• Rob Lake, Henderson/ Institutional Investors Group on Climate Change
• David Vidal, The Conference Board
• Gordon Hagart, UNEP-Global Compact Principles for Responsible Investment
Project
Moderator: Gavin Power, UN Global Compact
Session 2: Buy-side and sell-side research
(including a special focus on new emerging risks: geopolitical and security risks
of doing business in conflict areas)
Introductory presentations:
• Eric Borremans, BNP Paribas Asset Management
• Myles Packman, Dresdner Kleinwort Wasserstein
• Julie Hudson, UBS Investment Bank
• Luc Zandvliet, Collaborative for Development Action; Gerald Pachoud,
FDFA
Moderator: Peter Zollinger, SustainAbility
Session 3: Innovations in investment processes and products
Introductory presentations:
• Colin le Duc, Generation Investment Management
• Jens Langewand, Credit Suisse Asset Management
• Steve Falci, Calvert Group
• Matthew Kiernan, Innovest
Moderator: Ivo Knoepfel, onValues
16:30 Key insights from parallel sessions reported back to the plenary
16:45 Outlook
Where do stand? Where is the journey leading to?
• Ivo Knoepfel and Peter Zollinger
17:00 Adjourn
17:15 Reception, Apéro
 Conference Report

Investing for
Long-Term Value
Integrating environmental, social and governance value
drivers in asset management and financial research

— A state-of-the-art assessment —

54636—October 2005—750